Bank Resolution and Multinational Banks

Abstract

This paper studies the impact of different resolution policies on the choice of banks to expand abroad. The regulator can choose to resolve banks through bail-in or bail-out or a combination of the two. The choice of the regulator affects the cost of funding of banks, endogenous in the model. We study the relative profitability of alternative bank corporate structures, either multinational (large and diversified) or domestic (small and non diversified) for different levels of public support. Our model allows us to identify the potential impact of the resolution policy on the structure of the banking system. Lower levels of public support increase the cost of funding for all banks, in line with recent empirical evidence. We show that a reduction in the level of public support (from bail-out to bail-in) induces banks to expand abroad in search for alternatives to save on their funding costs. Finally, we are able to identify the optimal resolution mix by taking into account the reaction of banks to the policy.